When it comes to group health insurance there are three types: fully insured, self-funded, and level funded. A fully insured plan removes most of the risk from the employee and employer and puts it on the insurance carrier. The cost of the plan is typically higher. n a self-funded program, the company provides all the funds for the medical claims. The monthly premiums are based on multiple factors with the anticipation of covering all the plan's needs (administration, claims and stop loss coverage). A level-funded plan is when the employer makes a set payment each month that goes into a reserve account for claims, admin costs, and premiums for stop-loss coverage. If claims are lower than expected the remaining payments may be refunded at the end of the policy contract.
With average premiums for families increasing by 22% in the last 5 years, employers look for ways to control group health insurance costs. Understanding what it means to be “fully insured” vs self-funded or level-funded is imperative to ensuring that employers offer the best health insurance packages to their employees and control costs.
When it comes to group health insurance there are three types: fully insured, self-funded, and level funded.
In a nutshell:
- A fully insured plan removes the risk from the employee and employer and puts it on the insurance carrier. The cost of the plan is typically higher.
- A self-funded plan puts most of the risk on the employer. It offers a higher chance of savings. In some cases, the possibility of a credit at the end of the plan year based on the claims of the group.
- Level-funded is a combination of the two. Think of a self-funded plan with training wheels. The employer will not have the financial risk at the end of the plan year, but may or may not receive a credit.
We will take a deeper look at each of these options.
A fully insured plan removes most of the risk from the employee and employer and puts it on the insurance carrier. The cost of the plan is typically higher.
When you think of “insurance” you are thinking of “fully insured.” The individual or employer pays a premium to the insurance carrier and in return, the insurance carrier is responsible for paying future medical claims that are covered by the policy and beyond a certain annual “out-of-pocket maximum.”
How your premium is determined
Premiums for fully insured plans are determined by adding anticipated claims cost, administrative fees, applicable taxes and stop loss coverage. These premiums are set for a specific amount of time, typically a 12-month period, and there are no additional variable costs. The size of the group also has an effect on premiums.
- Small group (less than 50 employees) premiums are “community rated.” All groups with fewer than 50 employees in the same geographic area pay the same premium.
- Mid-size group (50 to 100 employees) premiums are based on several factors, including age of employees and dependents, type of coverage offered, previous claims data, etc.
- Large group (100+ employees) premiums are also based on claims history, size of the group, age of employees, number of dependents covered, etc.
For instance, a family's out of pocket maximum may be $5,000. A dependent has his tonsils removed with a claims cost of $10,000. The father has open heart surgery for $500,000. The family is responsible for $5,000. The insurance carrier covers the remaining $505,000 without increasing the monthly premium during the contract period.
If the medical costs are more than the premium or claims are trending higher than the premium community rating or risk pooling comes into play.
Think of your community pool and all the people out for a swim. While your son just had his tonsils out, and your husband had heart surgery, the family next to you might be having a healthy year with minimal claims. The family across the way has had a few sinus infections but no other major claims. These claims' factors are ‘pooled’ together to create a community rating. This spreads the risk equally amongst all enrolled with a carrier in a specified region.
What happens when you renew your plan
The insurance carrier must make enough money each year in premiums to cover the cost of the claims. If the carrier determines that medical costs are exceeding the premiums collected, you will see an increase in premium. You have no control over these increases and often do not receive detailed information as to the reasoning behind the increase.
- Small group increases are based on the “pooled risk” of all individuals enrolled in the same plan. That means there is no consideration of the health of a group. While your group may be healthy with very few claims, another group may be much sicker and contributing to the increase in claims disproportionately. None of that matters, however, and all groups will be charged the same increase.
- Mid-size group increases also consider the pooled risk but will take into consideration the group’s overall health. If your group is healthy and has what the carrier determines to be average or below average use of the plan, you could see more stable rates with limited increases.
- Large group increases consider pooled risk as well as the cost of claims for your group. The carrier will evaluate all health and prescription drug claims, pointing out high dollar claims and the overall cost of your plan. Some groups with below average use may receive decreases in premium while groups with high dollar claims will see increases.
Carriers will also evaluate plan designs each year and make changes. This may include increases to deductibles, coinsurance, copayments and out-of-pocket maximums. A fully insured group will need to determine if the current plan design is still working for employees or if a new plan will need to be selected.
Plan design changes can affect premiums as well. A richer plan with lower out-of-pocket maximums and copays may increase premiums, while implementing a higher deductible plan could save you money.
Take fully insured and do the opposite. In a self-funded program, the company provides all the funds for the medical claims. The monthly premiums are based on multiple factors with the anticipation of covering all the plan's needs (administration, claims and stop loss coverage).
The employer will typically buy stop-loss coverage from an insurer to protect themselves from large claims. The employer will pay a premium for protection in case the actual claims exceed the predicted expenses. For example, if the actual claims exceed by 25% then this protection would cover the remaining costs.
Self-funded plans are often not an option for smaller employers. The fewer the employees the harder it is to predict the costs of claims. And in many cases, small employers are not prepared to have funds readily available to cover large claims.
What is covered
Self-insured plans are flexible in their design. Benefits can be customized by the group but must follow ERISA, a sweeping federal law that ensures employees are offered certain benefits, such as continuation of coverage when they terminate their employment.
Often, groups hire a third-party administrator (TPA) to help them analyze and manage the plan. This can include setting and collecting premiums, creating an effective plan design, paying claims and managing stop loss.
Because employers want to limit claims costs, many self-insured plans also include wellness benefits such as programs to quit smoking, encourage weight loss and manage chronic illness.
How your premium is determined
The first two things to consider when you decide to fund your own claims are current plan design and claims costs. A complete analysis will help determine the correct premium.
You will also need to evaluate your fixed costs versus variable costs.
- Fixed costs include administrative fees, stop loss coverage and any other set fees charged per employee.
- Variable costs include health care claims.
What happens when you renew your plan
Self-insured plans don’t technically “renew” every 12 months, but there is an evaluation of the plan to make sure it’s meeting expectations; costs are adjusted as needed. Here are a few factors that can affect premiums.
- Claims: As you are funding your own claims, it’s important to calculate the amount of premium collected vs. costs. If you have had an increase in claims costs, premiums will need to increase. If you saw a decrease in claims costs, premiums may be adjusted. However, it is important to continue to build a reserve to cover unexpected expenses.
- Provider network: The plan contracts with a provider network each year to offer employees access to providers. You will need to evaluate whether the current network is sufficient. If changes are made, premiums may be affected.
- Stop loss coverage: Typically, self-insured plans do not assume 100 percent of the risk for high dollar or catastrophic claims. You will buy stop loss insurance to cover these unexpected expenses. At renewal, you will examine claims from the previous 12 months to determine if the stop loss amount must be increased. At the same time, rates will be set by the carrier to cover unexpected losses and allow for changes in your employee population.
Small groups and employers of 10 to 50 people face unique challenges when providing health care to their staff. Without the resources of a large company, the cost of coverage can be a considerable burden to both employees and the business itself.
A level-funded plan can potentially provide financial relief to these smaller groups, helping them budget for and better control rising costs. By providing these plans, your agency can reach a wider audience.
The plans act like traditional fully insured plans, but offer rate relief and the possibility of a credit at the end of the plan year.
How do level-funded plans work?
Level-funded plans are underwritten by a commercial insurer or third-party administrator (TPA). These plans use a census of employees to create a cost projection and determine a flat (or level) monthly cost for the coverage. The premium includes a claims allowance, a fee paid to the TPA or commercial insurer, and stop-loss coverage.
Each month, employee claims are paid from the claims allowance. If an employee has a large claim due to a major illness or injury, the stop-loss insurance covers the portion of the claim that is higher than the agreed-upon dollar amount. No matter the amount of claims each month, the employer pays the same premium. At the end of each year, claims and costs are evaluated.
If the group has fewer claims than expected, an excess claims allowance may be refunded to the group or used as a credit for the following year's policy. Therefore, the group might have a lower monthly rate for the next year.
If the group performs as expected, with claims in line with the estimated amount, their rate for the next year may be similar or have a minimal increase for inflation.
However, if the group experiences more claims than estimated, there will be increases — sometimes significant ones — in the premium for the next year. If claims remain high or a group's demographics suggest increased risk for high claims, it may be advantageous for a group to switch back to a fully insured plan.
Who benefits most from a level-funded plan?
Small groups made up of healthy individuals stand to save the most when implementing a level-funded plan. Because level-funded groups do not rely on community rated risk pools, their costs may be lower than their experience in fully insured Affordable Care Act (ACA) plans. Fully funded plans may include many high-risk individuals, which can raise rates for everyone who uses the plan.
Small, healthy groups are also likely to have lower rate increases due to fewer claims. Over a few years, they could see substantial savings when compared to a fully insured ACA plan — as much as 30%, by some estimates.
If the group’s rate starts to climb, they may want to consider switching back to a community-rated ACA plan. As their broker, you can help them evaluate their health risks and make a calculated decision that could benefit their business.
Who may not benefit from a level-funded plan?
Level-funded plans are not available in every state (including New York and California) due to stop-loss coverage regulations. Small groups in these states don’t have access to these plans and will need to remain with community-rated ACA coverage.
Older groups, groups with employees that take high-cost medications and groups with employees that have major illnesses (e.g., cancer, multiple sclerosis, rheumatoid arthritis) should be cautioned about the potential risks of moving to level funding.
Ready to review your options? Reach out to Rebecca Wilson and get started. email@example.com